Denied Credit? Here's What to Do

We’re in a recession, banks are under pressure and it’s getting harder for the average consumer to get a new credit card. So what’s going on here and, more importantly, what can you do about it?

Where Did All the Credit Go?Because the economy is in rough shape, banks are worried that more people won’t be able to pay their credit card bills. In fact, statistics bear this fear out. The percentage of balances deemed by credit card companies as uncollectible reached a record high of 9.3% in March, a figure that’s expected to rise to 12% next year, according to Moody’s Investors Service (Stock Quote: MCO). As a result, credit cards are becoming tougher to get and more expensive. Fewer people are getting credit card solicitations in the mail, and those who do apply for cards are subject to increased scrutiny, says Stephanie Jacobson, a JPMorgan Chase Card Services spokesperson (Stock Quote: JPM).

“As leading indicators began to change in early 2007, we adjusted our risk management policies and procedures to better manage potential losses, including raising the credit score threshold for direct-mail marketing,” Jacobson says. “And [we’re] increasing the number of applications that go through our internal judgmental review process.”

Your credit score often determines whether you qualify for a particular credit card and what your interest rate is if you do. If your credit score falls below a certain number, you could be denied a card, or be subject to interest rates as high as 30%.

“Credit score requirements have increased,” says Gerri Detweiler, credit advisor for Credit.com. Some time ago, “720 was considered prime. Now you may need a 750 or 760 score,” Detweiler says. “Lender requirements have gotten stricter.”

What to Do if You’re DeniedIf you apply for a card and do get denied, don’t worry. It’s not the end of the world and you do have options.

1. Check your mail. You’ll receive what’s called an adverse action letter from the creditor denying your application for a new card. It should list the reasons why you haven’t been granted a new credit card, and if you’ve been denied credit because of your credit score, you’ll be able to get a free copy of your credit report, says Detweiler.

2. Contact the creditor. If your application was denied for a reason you don’t understand, or if their reason is wrong, contact the credit card issuer and ask for an explanation, Detweiler advises. If you’ve been denied due to a discrepancy on your credit report, ask the credit card company whether you can dispute a discrepancy directly with them. But even if you can, you’ll want to contact the credit reporting agency directly to make sure that any mistakes on your credit report are addressed. You’ll be less likely to have a problem next time you get a credit check.

Once a mistake on your credit report has been corrected, you can request that the revised version be sent to anyone who’s recently pulled your report. This could improve your chances of getting a new credit card after all.

3. If you don’t have it, build it. If you have bad credit, there are a few things you can do to raise your score:

This one’s a no brainer, but if you’ve got lots of credit card debt, you need to work on paying that down. If you’re having trouble doing that, you may be able to negotiate lower APRs with your creditors.

Often, people with bad credit don't have enough credit history. If this is the case, you may be able to get a secured credit card. A secured credit card works like any major credit card except that you need to put down a deposit. The deposit isn’t used like it is with a debit card. You still make monthly payments. Your deposit, which equals your credit limit, is just there in case you default. You can get a secured credit card to establish credit with just a $200 deposit, but beware of steep fees, Detweiler warns.

Another way to build your credit history is by being added as an authorized user on another person’s credit card account. You don’t even have to use the account to build that credit. But if the accountholder ends up making late payments and running up their bills, it could hurt you as well. You can also open a joint account, but you’ll be equally liable for any balance on the account, and it’s difficult to remove one accountholder without closing the account entirely, Detweiler says.

Prevention: Before You Apply If you’re considering applying for a new credit card, first check your credit report and make sure there are no mistakes. Take a look at what the credit card requires for qualification, which can be found along with an application for a new card, on the company’s Web site or by calling a customer service line.

One common mistake people make is to assume that “as long as they’re paying bills on time that they have good credit,” Detweiler says. But about one-third of your credit score is actually determined by how much debt you carry. “The ideal ratio is 10% or less of available credit,” Detweiler says.